DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : A.Satya Vani Kumari
Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Poly. For Women, SURYAPET.
Year/Semester : III Year / V Semester
Subject : Business Economics –I
Subject Code : CCP-502
Topic : Markets
Duration : 50 Mts.
Sub Topic : Price and output determination under
monopoly.
Misconception of monopoly price.
Distinction between competitive
equilibrium and monopoly equilibrium.
Forms of price discrimination.
Teaching Aids : power point, animation

CCP502.67 1
Objectives

On completion of this period you would be able to

know:

 List Conditions for price discrimination

 Explain When price discrimination is profitable

 Explain the Determination of price and output under

Discriminating Monopoly

CCP502.67 2
Review

In the previous class we have discussed about:

 Price determination under monopoly

 Distinction between competitive equilibrium & monopoly
equilibrium
 Forms of price discrimination

CCP502.67 3
Conditions Necessary for Price
Discrimination
1.Existence of monopoly market situation

2. (a) Existence of separate sub-market

(b) Consumers have no inclination to move from one
market to another due to ignorance or lack or will.

CCP502.67 4
3. Apparent product differentiation.

4. Buyers have an irrational attitude that high priced goods

are of high quality.

5. Prevention of re-exchange of goods in different priced

markets.

CCP502.67 5
6. Non-transferability characterstics of goods.

7. Legal sanction of price discrimination.

8. Let-go attitude of buyers in case of small price

discrimination.

CCP502.67 6
When Price Discrimination is
Profitable
The price discrimination is profitable when :
a) Elasticity of demand in different markets differ.
(i) By charging more price in the market where elasticity
of demand is low and

(ii) By charging low price in the market, where elasticity

of demand is high.

CCP502.67 7
Proof for (A)
 When elasticity of demand differ in two markets at a
given price, marginal revenue also will differ

 Let us assume that there are two markets with a single

monopoly price of Rs.10/-, elasticity of demand in
Market-I, e1 = 2 and in Market-II, e2 = 4

CCP502.67 8
CCP502.67 9
 Hence, it is clear that Marginal Revenue (MR) in
Market-II with high elasticity of demand is high.

 So, if the output is transferred from Market-I to Market-II,

the marginal gain will be more than marginal loss.

 In the above example it is clear that if one more unit is

sold in Market-II, the gain is Rs.7.50 and the loss in
Market-I is Rs.5.00, so the net gain is Rs.2.50.

CCP502.67 10
 But, as the demand curve in Market - II
is sloping downwards, the price will have
to be lowered to sell more.

If price is Rs.9/-, then

 4 -1 
MR 2 = 9   = Rs. 6.75.
 4 
On the other hand , due to lesser output
supplied in Market I , the price may rise to Rs.11/ -

 2 -1 
Then MR 1 = 11  = Rs. 5.50.
 2 
CCP502.67 11
 So, due to price discrimination , Marginal Revenue (MR)
of inelastic demand market is also improved.

 Consequently, average revenue, total revenue and

profits also will increase.

 Hence, it is clear that price discrimination is profitable

when dealing with different markets with different
elasticities of demand.

CCP502.67 12
 Price discrimination is not profitable when the elasticity
of demand in different markets is same or in case of
Iso elastic markets.

 When the elasticity of demand is same, marginal

revenue will be same in two markets.

CCP502.67 13
 As Marginal Revenue (MR) of two markets is same, the
profit also will not change by transfering the output from
one market to another market.

 So, price discrimination is not profitable in case of Iso

elastic markets.

CCP502.67 14
 Pricing & output Equilibrium under
Discriminating Monopoly

For determining the price & output under Discriminating

Monopoly, the monopolist has to decide:
3. The total output to be produced.
For determining the total output, the monopolist
should equate marginal cost (MC) with combined
marginal revenue (∑MR) of different markets.

CCP502.67 15
2. How much of output to sell in different markets for
maximizing profits.

 For this purpose, he has to distribute the output in such a

way that marginal revenue in each market is the same.
 Larger quantity will be supplied to the market with elastic
demand.
 Lesser quantity will be supplied to the market with
inelastic demand.

CCP502.67 16
3. Price of product in different markets

 Price is to be decided in relation to the quantity

allocated for sale and position of demand curve.
a) Generally higher price will be charged in the market
with inelastic demand.

b) Lesser price will be charged in the market with elastic

demand.

CCP502.67 17
Assumptions for determining
equilibrium position
1. There are two separate markets namely market I & II.
2. The demand for the product in Market-I is relatively inelastic
and Market-II is relatively elastic.
3. The firm’s per unit revenue functions are known from the
demand curves.
4. Cost conditions are known.
5. Rationale of price discrimination is the maximization of total
profit (Represented in Fig.16)

CCP502.67 18
CCP502.67 19
Graph Explanation
 Fig. (a) represents the conditions of Market-I.
 D1is demand curve which is relatively inelastic.
 AR1 & MR1are Average Revenue & Marginal Revenue
curves.

 Fig. (b) represents the conditions of Market-II.

 D2 is demand curve which is relatively elastic.
 AR2 & MR2 are Average Revenue & Marginal Revenue
curves.

CCP502.67 20
Fig (c) represents the aggregate condition of both
markets I & II.
∑MR = MR1 + MR2
MC is marginal cost curve.
MC curve intersects ∑MR at ‘E’ , so at this point ‘E’ ,
MC = ∑MR. ‘E’ is the profit maximizing equilibrium.

CCP502.67 21
 ‘OQ’ is equilibrium output

 The monopolist allocates this ‘OQ’ output in such a way

that MR1 = MR2

 To determine whether MR1 = MR2 , a parallel line to ‘X’

axis ‘AE’ is drawn

CCP502.67 22
 AE crosses MR1 , at point ‘a’ and MR2 at point ‘b’.

 At points ‘a’ & ‘b’ ‘OQ1’ & ‘OQ2’ are equilibrium outputs
and ‘P1 O1’ & P2Q2’ are equilibrium prices in
Markets I & II respectively

CCP502.67 23
 ‘OQ’ is the total output where MC = ∑ MR

 Total profit is shown by the area between ∑ MR curve

& MC curve represented by ‘CBER’

 P1Q1 > P2Q2 , while OQ1 < OQ2 means higher price is
charged in the market where demand is inelastic and
vice versa

CCP502.67 24
SUMMARY

In this class we have discussed about :

 Conditions necessary for price discrimination

 When price discrimination is profitable

 Determination of price & output under discriminating

monopoly

CCP502.67 25
 Quiz

1. In monopoly higher price charged is always profitable

(True/False)

Ans: False

CCP502.67 26